22 September 2015

China, Gold and the New World Order: Part 2

As we continue to examine the dynamic shift in power between the East and West, we wanted to highlight some of the additional new platforms and organizations that are emerging to challenge the monopoly the West has on the global financial system. 

As we have pointed out in the first part, the most disruptive change in the next few years will most likely come in the currency markets. A shared or multi-currency reserve system will impact every country in the world.

China Oil Benchmark 

According to a recent article in RT, in an effort to play a more important role in establishing crude oil prices, China is planning on launching its own oil contract in October. The Chinese contracts will be denominated in the Yuan, not the Dollar. (Source: RT 2015 September 8th)

The main global benchmark is London’s Brent crude contract followed by West Texas Intermediate (WTI), which are both priced in US Dollars. The Shanghai based contract will compete in the crude futures market and be open to foreign investors.

The article in RT reports that China is one of the world largest buyers of oil, with nearly 60% of its oil consumption coming from imports. Given the importance of oil to China, it makes sense the country is interested in playing a larger role in the trillion dollar oil futures market. 

The Beginning of the End for the PetroDollar?

By creating a new oil benchmark priced in Yuan, China is directly challenging the petrodollar. As many CelticGold readers know, oil is priced globally in US Dollars. As a result any country that imports oil needs to pay for that oil in US Dollars.

US Dollars are held in significant quantities by governments and institutions around the world. This is because the US Dollar is commonly used in international transactions, such as the purchasing of oil. 

The new China oil benchmark could lessen the Dollars dominance in global oil trading. Just as we will see with Shanghai Gold Index, the China Oil Contract will be priced in Yuan. So now both gold and oil will both soon be priced in a currency besides the Dollar.

BRICS Development Bank 

This summer the BRICS group of emerging economies launched its New Development Bank (NDB) in Shanghai. The bank is backed by Brazil, Russia, India, China, and South Africa. The bank is seen as an alternative to the Western led World Bank and the International Monetary Fund (IMF).   

It is reported that each of the member countries will put an equal share of the $50 billion in start up capital. The goal over time will be to grow this to a $100 billion investment. The purpose of the New Development Bank will be to finance infrastructure projects in the BRICS nations. 

It is said that the objective of the New Development Bank is to compliment and not compete with the existing Western systems. However, it seems clear that the East is looking for a way to have more influence in the global economy.

In an article in RT, International affairs expert Sreeram Chaulia was quoted as saying:

“We needed something that would counter the hegemony of the Bretton Woods institutions that have been defining the global financial architecture for the last 60 years. I think it’s a huge new player and rightly it’s called New Development Bank, as the BRICS bank is formally called”. (Source: RT 2015 July 21st)

A New Economic Power

As reported in the RT article, the BRICS represents 42% of the worlds population, and about 20% of the worlds economy based on GDP. The total trade between the countries is $6.14 trillion, or nearly 17% of the worlds total.  

The New Development Bank will use member national currencies thus bypassing the US dollar. In addition, the BRICS countries are also exploring the possibility of building an alternative to SWIFT, the international payment network.

The SWIFT is a vital worldwide financial messaging network to process the interbank transfer of funds. So a new SWIFT alternative could protect the member countries and provide greater independence from the West. It will also allow payments to be settled in national currencies.

Asian Infrastructure Investment Bank (AIIB)

China launched the AIIB in 2014 with an objective to finance new projects in Asia. Just like the BRICS Development Bank, the AIIB is an alternative to the World Bank and the International Monetary Fund. 

The bank will be based in Beijing and have a capital base of approximately $100 billion. The bank is expected to start operations next year and already has 57 countries as founding members with another 20 counties that are on the waiting list. 

What’s so interesting about the membership of the new AIIB is how truly global it is. Members range from the Asia-Pacific region, to the Middle East, to Western Europe and Russia.

The World Bank and the IMF have been the cornerstone of the world financial system since the 1940’s. These institutions have designed the framework that has led to the current financial system that operates today. But now with the power of China backing the AIIB and the New Development Bank, new alternatives are coming that will lessen the influence of the West.

The New Silk Road

The last piece of the puzzle is the New Silk Road, which is the world largest infrastructure project. 

The New Silk Road will extend more than 8,000 miles and cover over one-third of the circumference of the Earth. It will include highways, roads, high speed rail, fiber optic networks, ports, and energy transmission and distribution lines. 

It will connect three continents; Asia, Europe and Africa, covering a population of 4.4 billion with an economic output of $21 trillion. This will be the largest economic corridor in the world. (Source: Business Insider 2015 May 22nd) (Source: oilprice.com 2015 May 21)

In 2013, Chinese president Xi Jinping announced the New Silk Road. If everything goes according to schedule it could be completed by 2025. The project will connect the Atlantic shores of Europe with the Pacific shores of Asia.

World’s Largest Gold Fund and the Silk Road

According to an article in ZeroHedge, China is setting up the worlds largest physical Gold fund. The fund, led by the Shanghai Gold Exchange (SGE) is expected to raise and estimated 100 billion Yuan (16.1 billion Dollars) in three phases. (Source: ZeroHedge 2014 May 24th)

Some 60 countries from the New Silk Road will invest in the new Gold fund. The fund will facilitate Gold purchases for the Central Banks of the member sates to increase their holdings of the yellow metal, according to SGE.

It is also being reported that the fund is part of a plan to "increase the influence of (Chinese currency) RMB in gold pricing", according to Chinese officials. (Source: Business Insider 2015 May 26th)

Summary

The New Silk Road, the BRICS Bank, the Asian Infrastructure and Investment Bank and the Internationalization of the Chinese Yuan will result in the biggest changes to the wold economy since the 1940’s.

Gold is an asset that looks to play an important role over the next 10 years. Even if the yellow metal is not formally part of the new monetary system, it is clearly an asset class that is viewed as a store of wealth in the East.

Those of you who have been discouraged by Gold’s recent price action should remember to keep the big picture in perspective. Gold’s biggest gains are still yet to come.

Author: celticgold.eu

Older China, Gold and the New World Order: Part 1 Newer Global Implications of a Fed Rate Hike